Convergence in social protection benefits across EU countries por Javier Alonso* Miguel-Angel Galindo** Simón Sosvilla-Rivero*** DOCUMENTO DE TRABAJO 97-03

January 1997

C. U. Luis Vives.

Universidad Complutense de Madrid.

FEDEA y Universidad Complutense de Madrid.

Abstract

This paper studies the degree of convergence in per capita social protection benefits registered in the European Union during the 1966-92 period. To that end, we use data supplied by Eurostat and compute the two indicators more widely used in convergence analysis: -convergence and -convergence.

JEL Codes: F42, H53, O52.

Key words: Social protection benefits, convergence, European Union.

1.- Introduction

Social policy coordination has constantly been present in the agenda of the current European Union (EU). The most powerful reason for such interest has been to facilitate higher labour mobility across countries, since the safety net system is an important disincentive to job mobility (see, e. g. OECD, 1990).

This paper examines the degree of convergence in per capita social expenditure across the EU countries during the 1966-92 period. To that end, the indicators developed by Barro and Sala-i-Martín (1991 and 1992) are applied to data on social protection benefits gathered by Eurostat according to the European system of integrated social protection statistics (ESSPROS).

The convergence indicators are presented in section 2, while the empirical results are shown in section 3. Some concluding remarks are offered in section 4.

2.- Convergence indicators

Although there are many definitions of convergence in the literature (see, e. g., Quah, 1993), there are two convergence indicators that have been widely used: -convergence and -convergence (see, e. g., Barro and Sala-i-Martín, 1992). The former takes place if it is found that, for a group of countries, those that start out the sample period with below-average incomes tend to grow faster than do countries that start with above-average incomes, whereas the latter is found when there is a decline in the dispersion of income as time passes.

In our case, we will use these indicators to estimate the possible convergence of per capita social protection benefits and, therefore, we will say that there is -convergence if we find a negative relation between the average growth rate of such benefits and the logarithm of its initial level. On the other hand, -convergence will appear when the standard deviation of the logarithm of the social protection benefits tends to decrease over time.

In this way, if represents the level of per capita social protection benefits of country i in the year t, -convergence can be analysed through the estimation of the following equation:

\[(1 / \mathrm{T}) \log (\mathrm{G} _ {\mathrm{iT}} / \mathrm{G} _ {\mathrm{i0}}) = \mathrm {a - b\log(G_ {i0}) / T+ \epsilon_ {it}}\tag{1}\]

where 0 and T represent the initial and final years, respectively, and is an error term. The estimation of the parameter b allows to obtain the annual rate of convergence , since .

3.- Empirical results

As it has mentioned above, in this paper we have used data on social protection benefits collected by Eurostat (ESSPROS), a harmonized system that provides a mean to analyse this kind of benefits. The categories considered within these benefits are: 1) sickness, 2) invalidity and disability, 3) occupational accidents and diseases, 4) old age, 5) survivors, 6) maternity, 7) family, 8) placement, vocational guidance and resettlement, 9) unemployment, 10) housing and 11) others. Our sample covers the period 1966-92 (the latest available), and the countries under study are Belgium, Denmark, France, Germany, Ireland, Italy, Luxembourg, The Netherlands, Portugal, Spain and the United Kingdom (that is, all the countries member of the EU in 1992, except for Greece because data are not available for this country).

Figure 1 shows the standard deviation of the cross section of the logarithm of per capita social protection benefits (SPB). As can be seen, there is a tendency toward -convergence: the dispersion was initially reduced from 0.85 in 1968 to 0.54 in 1974, then it increased up to 0.87 in 1978 and it eventually decreased to 0.22 in 1992. The increase between 1974 and 1978 could reflect the effects of the oil crisis that affected in a different way to the various economies considered. In fact, -convergence (divergence) in social protection benefits and in Gross Domestic Product (GDP) exhibit globally similar patterns, especially since 1974 (see Figure 1). This relation can be clearly seen when the correlations between both indicators are computed: for the whole period considered, such correlation is 0.80, being 0.49, 0.96, and 0.95 for the sub-periods 1967-74, 1974-78 and 1978-92 respectively.

Concerning -convergence, Table 1 reports the estimations of equation (1) for the sample periods mentioned above. Columns 2 and 3 show the estimation results of the cross-section by ordinary least squares (OLS), whereas columns 4 to 6 and 7 to 9 offer the results of panel data estimation of the fixed and random effects models, respectively.

Estimation results by OLS confirm the conclusions drawn from the -convergence analysis, an 1% annual convergence is attained for the period 1966-74, a 5% annual divergence results during the period 1974-78 and eventually a 3% annual convergence for the 1978-92 period can be observed.

The convergence rate for the whole of the sample is around 2%. However, the hypothesis that has been constant along the whole sample is rejected using likelihood ratio test (RV = 28.38, significant at the 1% level).

When we perform panel data estimations (which is suitable given the nonequal individual effects as suggested by the F test values of Table 1, column 6 -all of them significant at the usual levels), results hardly change for the subperiods 1966-74 and 1978-92, but a higher divergence rate is obtained for the years 1974-78. Something similar happens when we estimate the random effect model (but this time a lower divergence rate is found during the period of crisis). However, the values of the Hausman tests imply that the individual effects are correlated with the regressors and therefore the results obtained are not consistent, being the fixed effect model the proper estimation method.

4.- Final remarks

This paper has examined the degree of convergence in per capita social protection benefits registered in the EU during the 1966-92 period. We have used data from Eurostat for 11 out of the 12 member countries that formed the European Union in 1992 (data from Greece are not available). The two most commonly used convergence indicators have been computed: -convergence and -convergence. The results of both indicators suggest that there has been certain convergence in such benefits during the 1966-74 period, while important divergence was found for the years 1974-78. Finally, for the 1978-86 period convergence is observed again, being this time more intense than in the initial period.

These results, in turn, suggest that some countries have been carrying out a stronger effort, as far as social protection expenditure is concerned, in order to make their situation converge with that of other countries where the expenditure was much more significant. This effort can contribute to facilitate labour mobility within Europe and can have important implications for the speed of growth in each European country and the EU at large (see, e. g., Razin and Yuen, 1996).

References:

Barro, R. J. and X. Sala-i-Martín, 1991, Convergence across states and regions, Brookings Papers in Economic Activity 1, 107-182.

1. Barro, R. J. and X. Sala-i-Martín, 1992, Convergence, Journal of Political Economy 100, 223-251.

OECD, 1990, Employment Outlook.

Quah, D., 1993, Galton's fallacy and tests of convergence hypothesis, Scandinavian Journal of Economics 95, 427-443.

Razin, A. and C.-W. Yuen, 1996, Labour mobility and fiscal coordination: Setting growth agenda for an Economic Union, CEPR Discussion Paper No. 1342.

Figure 1: Dispersion of social protection benefits (SPB) and of GDP across the European Union, 1967-1992

Table 1: β-convergence in SPB across EU countries FEDEA - D. T. 97-03 por J. Alonso, M. A. Galindo y S. Sosvilla

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Table 1: β-convergence in SPB across EU countries FEDEA - D. T. 97-03 por J. Alonso, M. A. Galindo y S. Sosvilla